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The main changes in office rental and vacancy rates took place in the first half of 2009 when many companies started to restructure their activities and look aggressively for cost saving opportunities. If in the first months of 2009 the lack of tenants was a huge problem for office buildings that were completed in the end of 2008 and beginning of 2009, then by the second quarter of 2009 it became a relevant problem for all office buildings’ owners. Tenants started negotiating lease agreement terms, asking for rent reductions and moving to smaller and cheaper premises, several premises remained vacant because of bankruptcies. As many lease agreements in A-class office segment ended in 2009 (for example City Plaza and Nordea Building in Hobujaama Str), the vacancy rate increased the most in A office class. However, the second half of 2009 showed some positive signs as Metro Plaza managed to reduce vacancy substantially (from 30% to ca 10%) and also Hobujaama building signed a lease contract with the one new large tenant (Kredex). In the second half of 2009 office rental rates started to stabilize. The changes in Employment Contracts Act, which came in force from July 1st did not have considerable affect on rental rates, although a threat that these changes would bring an extensive dismissal, resulting in less need for space, existed.

Contrarily to office and warehouse premises, in the beginning of 2009 it seemed that the crisis has not affected shopping centre (where most of the retail stock is located) owners nearly at all, only clothing and footwear retailers were suffering from continuous discounts, decreasing turnover and downward profit. Several shopping centres completed their enlargements (Rocca al Mare in Tallinn, Lõunakeskus in Tartu) and a new entertainment centre Solaris was opened in Tallinn in October (last year). In addition the construction works of Kristiine Shopping Centre in Tallinn started in autumn 2009. Completion time for the works is set on September 2010 and according to the information from Kristiine Shopping Centre as of January 2010, ca 80% of the new leasable area is already covered with lease agreements, for remaining 20% negotiations are in progress. Still, in the second half of 2009 the economic downturn hit the shopping centers’ landlords as well – similarly to office sector tenants started asking for rent reductions to cope in the changed economic terrain. By the end of the year several sporting goods and clothing retail chains who were suffering in financial difficulties were making plans to close down some of their stores.

By the recent months’ news and retail sales numbers it can be predicted that 2010 will be more difficult for shopping centre owners than 2009 as more considerable changes in tenant list, rental and vacancy rates are yet to come. Since the tenants who are struggling in difficulties can not postpone their decisions much longer and the threat that some retailer companies or chains are becoming out of reserves and solutions for their dept service is every month more and more likely, the main changes will probably occur in the first half of the year. From the second half of the year the rental and vacancy rates will probably start to stabilize similarly to office market.

Warehouse and industrial market

As many local and foreign industrial companies closed town their branches in Estonia in 2009 due to significant decrease in consumption, export volumes and transit, the vacancy rates increased and rental rates fell even up to 50% compared to previous years. The amount of vacant industrial premises rose mainly due to new speculative projects that were completed in the end of 2008 and companies that ended their activities or moved to smaller premises. Practically all unfinished and planned industrial park projects were frozen and postponed to the future. When 2009 was rather quiet year on the matter of tenants looking for industrial and warehouse premises, the last quarter of 2009 showed that low prices have started attracting foreign industrial companies again.

The situation of warehouse and industrial market in 2010 depends greatly on the export, transit and consumption growth. Many changes have already been made in 2009, so hopefully the current year will be more stable in the context of rental and vacancy rates. However, significant threat still lies in possible bankruptcies of occupying companies which will result sudden and high increase in vacancy. Similarly to office premises, the hidden or secondary vacancy might become more visible in 2010 when companies that have managed to coupe with surplus area will start to offer it for sublease.

Investment market

In the first half of 2009 the investment market was literally in lethargy, but the second half of 2009 showed clear signs of revival as the investors’ and owners’ expectations about transaction terms started equalizing (one relevant reason for that was also financial difficulties of sellers). Together with the overall sentiment improvement, local investors’ interest for sustainable cash flow objects grew and several transactions were concluded. Still the investment volumes in 2009 stayed rather low, as only 5-6 known cash-flow investment transactions were concluded. Most of the transactions were up to 3 MEUR in volume and no foreign capital was introduced.

In the end of 2009 a number of negotiations on commercial objects were in the process, from which can be presumed that some more transactions will take place soon. Investors are continuously looking for good investment opportunities and as the yields have increased from the peak times and prices have fallen considerably, in case of smaller objects for some investors’ having loan capital is not even necessary. However, banks have also announced that the loan conditions are starting to improve. All prior and a quite high probability that Estonia will join the Euro-zone in 2011, indicate that the investment market will be more active in 2010. Most desirable objects among investors are commercial and industrial properties in good location, with sustainable cash flow and strong tenants.

Source: Colliers International Advisors